Assessing impact from reduction in stake by Naspers/Prosus
• Open-ended share repurchase programme of Prosus and Naspers shares to result in the sale of small
numbers of ordinary shares in Tencent regularly and in an orderly manner
• Surprise development given Prosus’s previous commitment not to sell any further Tencent shares for
at least three years from Apr 2021; impact likely manageable nonetheless
• Unchanged FV of HKD466
Investment thesis
On 27 June 2022, Naspers and Prosus, substantial shareholders of Tencent with a ~29% stake in the company, announced that they would begin an openended, repurchase programme of Naspers and Prosus shares. This would entail Prosus selling small numbers of ordinary shares in Tencent regularly and in an orderly manner, while concurrently purchasing Prosus and Naspers shares pursuant to their repurchase programme for as long as the group’s trading discount to net asset value is at ‘elevated levels’. All considered, we believe that the impact on Tencent’s share price from this latest development is likely to be manageable. Per Prosus’s announcement, we understand that the number of Tencent shares sold per day is anticipated to be a small percentage of its average daily traded volume. Nonetheless, the duration of the repurchase programme is unclear, and there remains uncertainty over Prosus’s and Naspers’s target trading discount. Still, we do not rule out the possibility that Tencent could look to partially cushion the impact from this development via share buybacks funded from its stakes across its portfolio of investees, especially from the more mature entities. While we remain constructive on Tencent’s longer-term prospects and the recovery outlook of the China internet complex, we still maintain our relative preference for JD.com, NetEase, and Meituan per our last sector note.
Investment summary
• Open-ended share repurchase programme of Prosus and Naspers shares – On 27 June 2022, Naspers and Prosus, substantial shareholders of Tencent with a ~29% stake in the company, announced that they would begin an open -ended, repurchase programme of Naspers and Prosus shares. This would entail Prosus selling small numbers of ordinary shares in Tencent regularly and in an orderly manner, while concurrently purchasing Prosus and Naspers shares pursuant to their repurchase programme for as long as the group’s trading discount to net asset value is at ‘elevated levels’. Despite Prosus’s previous voluntary restriction on the sale of its Tencent shares, Tencent has given their support of the withdrawal of the restriction. Both boards of Naspers and Prosus have expressed their ‘great confidence in Tencent’s long -term prospects’. We note that this development comes on the heels of 2 previous rounds of stake cuts in 2018 and 2021 of ~2% each.
• Impact likely manageable – All considered, we believe that the impact on Tencent’s share price from
this latest development is likely to be manageable. Per Prosus, we understand that the number of Tencent
shares sold per day is anticipated to be a small percentage of its average daily traded volume. Had the group executed its repurchase programme over the last 3 months within European regulatory limits, the resulting shares in Tencent that would have been sold on a daily basis would have been (on average) not
more than ~3 -5% of average daily traded volume. Nonetheless, the duration of the repurchase programme is unclear, while there remains uncertainty over Prosus’s and Naspers’s target trading discount. Still, we do not rule out the possibility that Tencent could look to partially cushion the impact from this development via share buy -backs funded from its stakes across its portfolio of investees, especially from the more mature entities. While we remain constructive on Tencent’s longer -term prospects and the recovery outlook of the China internet complex, we still maintain our relative preference for JD.com, NetEase , and Meituan per our last sector note.
ESG Updates
• With about 39% of China’s mobile payments market share (as of 1Q20), WeChat Pay may be subject to
stringent scrutiny in light of the regulator’s clampdown on FinTech in China. Nevertheless, Tencent’s expansion into retail microfinance and loans to small -medium enterprises through WeBank, may allow growth opportunities while expanding financial inclusion. Tencent appears to have a robust data privacy
framework compared to its peers, despite a diverse portfolio of services. However, with 1.2b monthly active WeChat users in 3Q20 resulting in substantial personal data management, Tencent’s data practices,
including consent, have attracted regulatory criticism. On carbon emissions, 83% of Tencent’s revenues are from less carbon-intensive business lines relative to peers.
Potential catalysts
• Payment/cloud/subscription business could grow faster and be more profitable than we anticipate
• International expansion could be better than we expect, reigniting growth in users and engagement
• Advertising could scale faster than we project resulting in better growth and earnings.
• Shorter/shallower-than-expected investment cycle
Investment risks
• Operates in highly sensitive areas which could see a clamp down from the Chinese government (gaming, social media, chat, online video, newsfeeds) or other regulatory headwinds
• Poor performance of legacy games or pipeline disappointment could result in drastic revenue
slowdown
• Prolonged macro challenges and Covid-19 related lockdowns
